How to: VFM & Red Flags

Topic outline

This chapter will use a preliminary report published by the Transparency International Defense and Security Programme (TI DSP) through which they identified six key "red flags" categories in public procurement. Presence of these red flags in a procurement system can indicate that the process isn't achieving is potential Value for Money (VFM) and, more specifically, that it is more prone to corruption, inefficiencies and lack of transparency.

The chapter will build the capacity of the learner to understand how to identify and react to these red flags. Specifically, on each page, it will:

The six red flag categories were identified through extensive use of interviews and case studies from 2014-2018. TI-DSP asked two principal questions:

What ‘red flags’ might have alerted officials, civil society or oversight bodies that more scrutiny was needed?

What specific data should be released in the future to help prevent the most common types of corruption, or facilitate its identification by oversight actors?

Analysis of these red flags can inform future reforms to the design of procurement processes by government officials, the conduct of due diligence checks by company and government actors, and the oversight activities of parliamentarians, journalists, NGOs, and law enforcement officials.

For the purposes of this chapter, the six red flag categories have been extracted and adapted. These are:

Competition is (deliberately) constrained.

Intervention in the procurement process that unjustifiably favours a particular company.

The risk to VFM

In a competitive market, too few bidders to an advertised tender, or a preference for a single bidder indicates that the full value of competition (cheaper goods works and services, innovation, efficient learning loops) is not being extracted through the procurement process.

There are of-course legitimate motives for restricting competition, For example, there may be only one supplier of a particular product, or the
procurement could be extremely urgent.

In these instances, the justification should be
objectively verifiable to the public or an oversight agency.

Case study: overpaying for collusion in Honduras

In Honduras, the NGO Transformemos Honduras (TH) revealed that a handful of Honduran companies controlled the medicines market. There were 214 companies registered to supply medicines but only 37 had ever won government business; 10 of these companies controlled 88 per cent of the market.

According to analysis by TH, the government overpaid for both medicines and medical equipment. The unit price of many medicines was more than one third higher than international averages calculated by the World Health Organisation (WHO). For example, chemotherapy drugs such as vinorrelbina, cisplatin and doxorrubicin were bought respectively at 34, 36 and 41 per cent above international averages. Basic medical equipment was also overpriced, with the sterilising soap Glutaraldehyde sold to the state at US$18.40/gallon, which was 83 per cent above the international average of US$10.66/gallon

This is a clear example of how constrained competition can reduce the value of public procurements. 1

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A high number of contract awards awarded to one bidder Or there are fewer than expected bidders to an openly advertised tender.

Through OCDS, procurement practitioners are able to see the amount of bidders per tender through the tender/numberOfTenderers field. Analysis and visualization of this, based on your data, is also available through the downloadable excel sheet in the resources toolbar (indicator 1.2.1)

Yes

The window for bidding can be unreasonably short.

OCDS can identify the length of tender periods through analysis of the tender/tenderPeriod field. This analysis is available through the same excel sheet (indicator 5.1)

Yes

The ministry can accept a bid from a supplier with terms that do not favour the supplier, then subsequently renegotiates more favourable terms—suggesting the company and an official could have engaged in “low-balling.”

Difference between award and contract amount is greater than X%. This analysis can be done using the following OCDS Fields: awards/value/amount; contracts/value/amount

Yes

Bidders or bids that appear legitimate can be set aside, with an unclear or no justification.

Supplier receives multiple single-source/non-competitive contracts from a single procuring entity during a calendar year. This uses the following OCDS fields: awards/suppliers; contracts/id; tender/procurementMethod = limited or direct; tender/procuringEntity.

No

The procuring entity can award the contract on a single source basis when a competition would be more typical, appropriate or economical.

Different types of procurement method is recorded in the procurementMethod field of OCDS and the percentage of each type is visualised in indicator 1.1 on your downloadable excel sheet (resources toolbar).

Yes

Two or more competing suppliers can win contracts in a repetitive order, suggesting they are colluding in a scheme known as “bid rotation.”

Create a probability score for each firm winning based on number and success rate of other firms within sector, location, etc. Flag occurs when outlier wins or loses based on probability. This uses the following fields: awards/suppliers; bid/bidders; tender/procuringEntity; awards/date

No, but data publicly exists

Companies can submit bids that appear intentionally defective, uncompetitive or that they prematurely withdraw from the competition, often at the last minute, leaving one remaining bidder.

Participation of a bidder that has bid at least X times but whose win-loss ratio is 2 standard deviations below mean. This uses the OCDS fields: bid/bidders; awards/suppliers;

No, but data publicly exists

The winning supplier can provide benefits to a losing bidder after the award takes place—for example, make payments to the loser or hire it as a subcontractor or other service provider—suggesting that the two companies may have colluded to favour the winner.

The risk to VFM

An official can use their formal or informal role in the procurement process to alter, or attempt to alter, the outcome in favour of a specific company. This may be because the official has intervened because they or someone in their political, social or business networks has an interest in the company, or that the company has paid the official for their help.

In many cases, the favoured company will not appear to be the most qualified, or it will not offer anything that advances the public interest in it being selected.

In other words, it increases the likelihood that suppliers are not selected on merit and therefore will not carry out the contract with the utmost effectiveness

Case study: Nepotism in Finnish health procurement

An Executive Director of the hospital district in northern Finland was accused in 2013 for favouring companies that were owned or controlled by his son. In 11 instances over 8 years the Executive Director bypassed procurement legislation and directed major IT programme contracts to these companies (health care IT programmes are classified as medical equipment).

The deals were constructed so that other players had no chance to participate. Agreements were made in private face-to-face meetings. Actually, purchases were sometimes also delayed so that the family companies had time to prepare for the calls for tender. 1

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An official can take unusual steps, for example by narrowing the technical specifications, to
ensure that a company is the only supplier able to compete under the revised offer terms.

Can be indicated by complaints from losing bidders that the specifications
are tailored to a competitor. This data is held tender/tenderers and the extension tender/complaintType

complaintType is not published by the GPP but information on complaints is available elsewhere

An official with final or high-level decision-making authority can override the outcome of the
procurement process, or otherwise alter the decision of the officials originally charged with
selecting the winners.

Winning bid is not lowest cost
when this is the evaluation criteria. OCDS fields: tender/awardCriteria; bid/statistics/value

No

The conduct of the procurement process can depart from the government’s established
rules, standards or criteria, and/or exhibits a high or unusual degree of discretion and/or
secrecy.

Contract is not public
Contract information is not
available on procurement
website. OCDS field: contracts/documents

An official with influence over the award can suggest, recommend or require that the
company partner with another company to apply for the contract or a sub-contract,
effectively creating a “forced marriage.” This can particularly be of concern when the
company imposed by the official is less experienced, offers less sophisticated equipment or
has political connections

The risk to VFM

Procurement officials and oversight actors should always take a closer look when a ministry does
business with companies that have politically exposed persons (PEPs) as legal shareholders, as a
conflict of interest can often arise. The presence of a conflict of interest is not a definite sign of
corruption. But it does significantly heighten the risk that the official could use their entrusted power
in ways that undermine the award’s integrity or potential returns to the state. In many jurisdictions, PEP-owned or managed companies are either prohibited from competing for
government contracts or face higher levels of scrutiny.

Favouring companies and "bid-rigging" reduces the value competition brings to the procurement process and inevitably means that governments pay more for less (effective) works/services/goods.

Case study: Bid-rigging in India

Corruption was discovered in 2008 in five multimillion-dollar health projects financed by the World Bank in India. The program was aimed at combating tuberculosis, malaria and HIV/AIDS. Investigation uncovered procurement corruption, including bid-rigging.

Further, investigators discovered substandard HIV/AIDS testing kits, which may have produced incorrect results and exacerbated disease spread. Yet, Indian public officials have expressed a level of acceptance regarding the corruption allegations, commenting it is systemic in India. India is also a known for having a large informal health sector susceptible to corruption and informal payments for health services . 1

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The PEP may fail to disclose conflicts of interest and/or fail to recuse themselves from the
selection process.

Conflicts of interest are not completely covered by OCDS. The closest it comes is recording documentation of conflicts of interest declared or uncovered through the conflictOfInterest field.

No

A PEP may be a legal shareholder in a company or sub-contractor which is selected for
tender and therefore entitled to dividends or some other share of its earnings. Similar
conflicts might exist where an individual has familial, personal, political, business or other
close financial ties to a PEP who is a shareholder, director or officer in the company and
could mean the individual is a proxy or “front” for the PEP.

Generally this can be achieved by comparing OCDS data with that of beneficial ownership, which is generally piecemeal. By itself OCDS can reveal a pattern of multiple sole source awards to one or a
few bidders, approved by the same official. OCDS fields: awards/suppliers; tender/procurementMethodDetails; (extension) tender/approvingOfficial/id

complaintType is not published by the GPP but information on complaints is available elsewhere

The supplier’s shareholder structure may include a chain or network of shell companies, or a
complex holding company structure, which obscures who ultimately owns or controls the
company. For example, through nominee shareholders, bearer shareholders, unissued
shares or a trust

Shell companies can be identified through analysing whether the supplier is less than 12 months old and has never
submitted a bid for another
contract. OCDS fields: awards/suppliers;
tender/tenderers; (extension) awards/suppliers/establishDate

No

The supplier may engage a PEP or his/her firm as a consultant or service provider.

OCDS does currently not cover this.

No

The PEP may be able to exert influence over decisions at multiple points in the selection
process, either by occupying more than one decision-making role, or by holding positions in
more than one of the official bodies involved.

OCDS does currently not cover this.

No

A PEP or his/her company may provide the supplier with a loan agreement, promissory note
or other debt instrument.

The risk to VFM

When a supplier that does not have sufficient technical, operational or financial capabilities wins an
award, it is unlikely to be the best choice for effectively executing the contract.

The supplier may
have been allowed to compete or prevail for an illegitimate reason or through mismanagement in the procurement process.

Case study: AV-Pharma’s deadly tourniquets

All operational combatants should carry
at least two tourniquets at all times. Used to stop traumatic bleeding,
tourniquets can prevent the loss of limbs or death from internal bleeding. A
faulty tourniquet can be lethal. In autumn of 2015, the Ukrainian Ministry of Defence
purchased 30,000 tourniquets from AV-Pharma. AV-Pharma had not been operating
for long—the company started producing tactical medical products in 2014, one
year before it was awarded the tender. While the tender was being arranged with
AV-Pharma, military conscripts reported that AV-Pharma’s tourniquets broke when
subject to pressure—on average in 60% of the cases where they were used.

The
inferior quality of the purchased tourniquets was confirmed by the volunteers
of the Medical Committee of the Association of People’s Volunteers of Ukraine.
The Committee highlighted as problematic the low standards prescribed in the
technical specifications and that testing had not been conducted into how the
tourniquets would be used in combat zones. 1

Click here for expandable table: How to identify and react to specific warning signs

The supplier may fail to meet the ministry’s pre-qualification standards or other
guidelines for the selection process, but be selected anyway.

Not available in OCDS.

No

The supplier and/or its principals may have no prior relevant work experience, little
or no industry reputation or name recognition.

Supplier is less than 12 months old and has never
submitted a bid for another
contract. OCDS fields: awards/suppliers;
tender/tenderers; (extension) awards/suppliers/establishDate

No

The company may have been incorporated or otherwise legally registered only
shortly before, or even after, the award. It may appear that the company was set up
specifically for the contract.

Supplier is less than 12 months old and has never submitted a bid for another contract. OCDS fields: awards/suppliers; tender/tenderers; (extension) awards/suppliers/establishDate

No

The company might not have the basic capabilities or assets needed to contribute,
including manpower, finances, equipment or technical skills. Additional concerns
could arise if the company’s finances are thin and it has submitted no financial
guarantee, balance sheet, audited accounts or credit rating.

The supplier might not show other basic attributes of a functioning business— for
instance, a physical address or office space, staff or a website.

Winning supplier's address is
a PO Box (consider: Address
of payment is PO Box). OCDS Fields parties/address (supplier) or
parties/address/streetAddress. payer/url can also be used to check the validity of websites

The risk to VFM

If the terms of a final contract agreed between the procuring entity and a supplier depart significantly from
expectations, past examples or industry norms, this should warrant extra scrutiny from oversight
actors.

Judging whether a procuring entity received fair value for a sophisticated weapon or piece of technology is
not necessarily straightforward. Many deals are products of negotiation. Corruption is by no means
the only reason why final terms may favour the winning company more than the government. For
example, officials might not have done a good job managing the award process or calculating whole-of-lifecycle
costs for a piece of medical equipment that requires frequent servicing and unique parts. They may have set
terms too low or negotiated poorly, based on limited experience, information or negotiating power. Risks to VFM related to this red flag can be significantly higher when none of the reasons above
are evident.

Case study: Variations in medicine pricing

The price of purchasing medicines varies enormously across the globe. In Ghana, the cost of
Ciprofloxacin, an antibiotic used to treat pneumonia, is eight times the international reference
price, according to data collected by Health Action International and analysed by Civio.

Although
price inflation of 800 per cent is hardly good value, it is preferable to the cost of the drug in Italy
or Kuwait where it is respectively 30 times and 100 times the reference price.13 Price disparities
affect high-income countries too. The same study shows a US$1000 pill in the United States
costs US$320 in Spain and US$554 in France.14 While comprehensive price comparison should
take into account multiple and complex factors such as the volume of the purchase, logistics
costs and exchange rate fluctuations, poor value for money can also be driven by corruption.1

Click here for expandable table: How to identify and react to specific warning signs

The final terms may include prices that are substantially lower or higher than market price.

This can be identified by mapping persistently high or increasing bid prices compared to
cost estimates, price lists, previous prices similar jobs
or industry averages based on an index for "outlier-ness"
based on how far each bid is
from the average of each type
of distribution mentioned here. OCDS fields: tender/value/amount;
tender/items/value/amount;
tender/procurementEntity;
bid/statistics/value

The terms or prices of the final award or amended contract can be significantly more
favourable to the company than those that it and the ministry initially agreed, or more
favourable to the supplier than those from similar deals signed by the government, yet
market conditions have not significantly changed.

This can be identified when a favored bidder wins award at low bid, but additional
fees are included during contract negotiation. Analysis should focus on the difference between award and
contract amount is greater
than X%. OCDS fields: awards/value/amount;
contracts/value/amount.

Yes

One or more terms of the contract can be changed shortly before signing, in a manner that
favours the supplier.

This can be identified by proxy when a favored bidder wins award at low bid, but additional fees are included during contract negotiation. Analysis should focus on the difference between award and contract amount is greater than X%. OCDS fields: awards/value/amount; contracts/value/amount.

No

The responsible procurement entity may fail to assess the market value of the contract it is
awarding.

OCDS records documentation of any market studies that took place as part of the planning for this contracting process. OCDS field: planning/marketStudies

Yes

The winner’s bid may be substantially higher or lower than ministry’s own assessed value for
the contract, or deviate widely from the bids made by other companies. Suspicions may be
stronger if the ministry’s value assessment appears realistic and based on sound technical
analysis, rather than simply an opening position in negotiation.

OCDS can give the average item value vs. item
value in given contract to assess whether per item value is higher or lower than average for this
item. OCDS field: awards/items/unit/value/amount

OCDS can show whether winning supplier provide a substantially lower bid
price than competitors by measuring whether the winning bid is lower than
other bids by 25% minimum
(when there are two or more
bids). OCDS Fields: awards/suppliers;
tender/tenderers;
bid/statistics/value

OCDS can show whether the tender value is higher or lower than average for this
item category, by measuring whether value is 2 standard
deviations from mean for item
category. OCDS fields: tender/items/value/amount;
tender/items

No

No

Will be available with new e-procurement system

The final award can show significant deviations from existing law or regulation, or from the
model contract used during the selection process.

Various OCDS fields can be compared against government guidelines. For example tenderDuration can be compared against minimum tender period as designated by law. This is visualised in your excel sheet (indicator 5.1)

Yes

The final terms can include non-standard provisions that reduce the winner’s obligations or
make the deal more valuable to the winner. These could include excessive tax holidays,
unclear or skewed currency conversion formulas or rates, unusually long payment windows,
debt guarantees, or other non-standard financial support from the government to the
winner.

Depending on the type of provisions OCDS may be able to help identify these warning signs.

The risk to VFM

A company involved in the award process, or an individual with an ownership interest in it, may have a reputation for, or a record of participation in, corruption, collusion or other relevant unethical misconduct. This could suggest that the company or individual has a propensity to engage in problematic business practices, or that officials treated them with favouritism.

The level of scrutiny prompted by this red flag should depend on factors such as the reliability of the evidence or how often the company or individual has been accused.

Case study: Anti-competitive systems in Nigeria

Nigerian law mandates open competitive
bidding for public contracts in which the lowest bid that meets a tender
specification wins the contract. In total, the 40 PHCs were built by 40
different contractors, with no company used twice. However, 26 of the 40
contracts were awarded for the precise amount of 21,986,893 million naira
(US$128,105), even though their budgets ranged from 23.8 million naira
(US$144,588) to 47.5 million naira (US$288,568) and were, on average, 33
million naira (US$200,479). The common and exact price of 21,986,893 million
naira (US$128,105) raises doubts about the competitiveness of the procurement
process and whether the procedures were in accordance with Nigerian law. It is
highly unlikely that 26 companies, bidding for 26 different contracts,
dispersed across eight different States, all arrived at the same low cost bid.
It is possible that the figure was a benchmarked average cost, but then
attention simply turns to the huge disparities in budget. It is also possible
that this figure reflects issues with the competitiveness and accessibility of
the tenders and even market collusion, which all undermined value for money 1

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